CTU Economic Bulletin No. 30

The September bulletin includes comment on employment, average weekly incomes, economic growth and monetary policy.

Comment

The economy has been growing strongly with a 1.7% increase in the June quarter and 3.5% over the June year.

The quarterly figure was the highest in the OECD but it is never wise to assess growth trends from one quarter alone. There are some who believe that the momentum can be maintained due to employment growth and migration continuing to fuel the domestic economy as the export sector wanes. However the forecasts for September quarter GDP are around 0.3-0.5% reflecting falling commodity prices, the lagged effect of higher interest rates, and an uncertain global outlook.

There is no doubt that there is now more focus on the crucial role of the labour market in underpinning economic growth. We have had very strong growth in employment in the last few years and we want to see that continue. But as the demand for labour increases and more skill shortages emerge, there is a short-term argument for much higher wages and a long-term issue about skill investment and productivity.

The CTU has argued that growth will come from investment in education including vocational skills, investment in quality infrastructure, creating a workplace environment that values the role of workers, an expansion of industry economic development processes, and greater dialogue between government, business and unions on productivity issues.

The Government is also in a strong position to underpin an investment approach to economic development. The operating surplus is over $2.3 billion for the last year. Net debt is down to just 16% of GDP - much lower than the 20% target. Although the Government has to be careful not to commit too much new baseline expenditure in case a much slower economy means cuts in real expenditure in the future, the Government should be in a position to deliver very positive budgets in the next two years. On the capital expenditure side, the low net debt surely creates a good opportunity for the Government to make a greater contribution to infrastructural development.

Employment

There is a growing awareness that the labour market holds the key to longer-term economic growth. The focus is mainly on skill shortages and the productivity of current workers as it becomes harder to find new workers. However it is significant to note that the increased demand for labour has meant more opportunities for older workers and also Maori employment has been much higher than for many years.

In the last three years Maori employment has increased by over 46,000. That means Maori workers got 36% of the new jobs in that period. Also two-thirds of the new jobs went to people aged over 46. The demand for labour seems to be continuing to grow fairly strongly. The ANZ Banks monthly tracking of job advertisements in major newspapers recorded a 1.6% rise last month, with Wellington reviving, Christchurch dipping, but the upsurge driven mainly by Auckland. On a more localised basis, a survey in Northland shows the wood processing industry now employs 370 people, compared with 95 in 1997.

Average Weekly Incomes

The NZ Income Survey is a household survey separate from the Quarterly Employment Survey and Labour Costs Index which also give details on wages. The latest Income Survey shows that average weekly income from all sources was $518, while the average weekly income from investments was $25. Income from investments has been included for the first time in the New Zealand Income Survey in the June 2002 quarter.

Not surprisingly, groups receiving the highest average weekly investment income were those aged 55 years and over, males, and those in the European/P?keh? ethnic group. Those in the 55 to 59 year age group received an average of $66 in income from investments while 15 to 19 year olds received $1. Males received an average of $29 compared with $22 for females, and those in the European/P?keh? ethnic group received $31 compared with $3 for M?ori and $2 for Pacific peoples.

Excluding investment income, the average weekly income for all people from all other sources was $494, an increase of 4.2% on the previous year. This was due to the increasing proportion of the population in paid employment, a 3.6% rise in average weekly income for those in paid employment to $686, and an increase of 1.7% in average weekly income for those not in paid employment to $176.

But the increase in average weekly income for those in paid employment came from two sources: an increase in wages and salaries of 2.0%; and an increase in income from self-employment of 8.9%. For those not in paid employment there were increases to benefits and pensions to adjust for inflation.

Average hourly earnings for those receiving income from wage and salaries was $16.68, and the median hourly earnings was $14.50. (The average is all wages and salaries added up and then divided by the number of people. The median is the figure you get by listing all wage and salaries and then identifying the midpoint in that list. The average wage tends to be higher than the median because of the small number of people on high wages/salaries). When comparing females with males, the ratio of median hourly earnings was 87.7%.

Average weekly income for all people was highest in the Wellington region at $597, followed by Auckland at $559 and Waikato at $506. The lowest average weekly incomes in the June 2002 quarter were in the Otago region at $432 and the Northland region at $438. The average weekly household income in the June 2002 quarter was $1,123 including $43 from investment income. The median weekly household income was $933. One parent with dependent children only households received the lowest average weekly household income of $511. The average weekly household income excluding investments was $1,081.

Economic Growth

GDP (production) increased by 1.7% in the June quarter. This follows growth of 0.9% in December 2001 and 1.0% in March 2002. The economy grew 3.5% for the year ended June 2002. The key contributor to this quarters growth was a lift in primary produce exports, with increases in dairy, meat and forestry exports. Overall, exports were up 6.2% this quarter and 3.3% for the year ended June 2002. Expenditure-based GDP rose a softer 1.2% in the June quarter.

Global Growth Outlook

New Zealand's top-14 trading partner growth outlook is now 2.6% for 2002 and 3.2% for calendar 2003. On a global basis the IMF predicts around 2.7% for 2002 and has revised down 2003 to 3.7%. The IMF states that after a "surprisingly strong" first quarter of 2002, the recovery has slowed everywhere except in the emerging countries of Asia.

First in the list of causes of the downward growth revisions, according to the IMF, are recent revelations of corruption and mismanagement among large multinational corporations. "Global financial markets have weakened significantly", states the Fund, because of "downward revisions of earlier -- and always optimistic -- profit forecasts ... and widespread concerns about accounting and auditing practices, particularly in the United States". A second major cause of the slower recovery, says the Fund, has been the "substantial turbulence in emerging markets", notably in Latin American and Turkey.

We can add to that uncertainty about the economic effects of a possible war with Iraq. It would push up oil prices even further with significant knock-on effects (for instance in New Zealand, higher oil prices have quite a significant flow-on effect to consumer prices generally).

Monetary Policy

The Government has signed a new Policy Targets Agreement (PTA) with the new Governor of the Reserve Bank. The policy target is to keep CPI inflation in a 1-3% target on average over the medium term (changed from 0-3%). This is generally in line with what the CTU was advocating. The official cash rate is expected to remain on 5.75% when reviewed in early October. Meanwhile, the United States Federal Reserve Bank has left the key interest rate unchanged at a 41-year low of 1.75%.

Fiscal Update

The financial statements for the year ended 30 June 2002 were close to forecast. The operating surplus was $2.33 billion. The OBERAC (which is the operating balance excluding revaluations of assets such as the Government Superannuation Fund and the Maui Gas contract) was $2.75 billion, $540 million above forecast. Net crown debt is down to $19.25 billion which is 16% of GDP.

Exports, imports, and balance of payments

The August merchandise trade deficit was $542million. The current account deficit is now trending up from 2.2% to around 2.5% of GDP and could reach 3% of GDP by year-end. Imports now continue to outstrip exports. While the current account numbers were much as expected, the August trade deficit was considerably higher than market expectations with a 7% monthly fall in exports. Imports of oil and vehicles were higher than expected. But a widening in the investment income deficit was the main driver of the increase, rising by $473m or 36% in the June quarter.

Statistics New Zealand reported that this was "largely the result of foreign investors earning more from their New Zealand investments and a fall in the earnings of New Zealand investors from their investments abroad". This is also a continuing legacy of the privatisation process from 1984 onwards, and the high penetration by foreign investors. On an annual basis this means that the investment income deficit has been $6.7 billion. This also reflects the fact that private overseas debt has risen from $27.4 billion (41% of annual GDP) in 1989 to $109.9 billion or 92% of GDP) today.

Food Prices

Food prices rose by 0.1% in August and 3.0% in the year. The next overall CPI will be announced on 15th October.

Housing

Building consents fell 18.3% in August, but this was mainly a reversal of a surge in apartment consents in July. Excluding apartments the decline was just over 3% and there is a view that the trend in rising dwelling consents may have slowed. "Leaky building syndrome" may mean a bit more focus at the consent stage now in any case which may have a temporary dampening effect on residential building consents.

Retail Sales

Retail sales rose by 0.5% in July and are up by 7.2% in the July 2002 year.

On the farm

You may be desperate to know that there are 43 million sheep, 3.9 million dairy cows, 2.2 million deer and 4.8 million beef cattle in New Zealand. Meanwhile Westpac's quarterly rural report noted that "the difficulty in finding and hanging on to skilled labour is hampering growth in rural industries..... farm workers wages do not appear to have kept pace with productivity gains in agriculture and that is one reason for the chronic skills shortage".

Manufacturing sector

Seasonally adjusted manufacturing sales for the June 2002 quarter increased by 2.9%. This follows increases of 0.5% in the March 2002 quarter, and 0.1% in the December 2001 quarter. Machinery and equipment manufacturing had the largest increase (up $227 million), followed by wood product manufacturing (up $127 million). There were two industries showing decreases, the largest of these being basic metal manufacturing (down $12 million). The value of finished goods stocks increased by 2.8% as at 30 June 2002 compared with 30 June 2001.

Migration

There were 95,000 (permanent and long-term) arrivals in the year ended August 2002, up 22,300 or 31% on the August 2001 year. In contrast, there were 18,300 or 24% fewer departures (58,800) in 2002. The overall result was a net migration gain of 36,200, compared with a net outflow of 4,400 in the previous year. The main contributors to this turnaround in net migration were non-New Zealand citizen arrivals (up 18,600), and New Zealand citizen departures (down 17,800).

There were net inflows from China (14,400), India (6,300), the United Kingdom (5,700), South Africa (3,200), Japan (2,300), Fiji (up 2,200) and Korea (2,000) in the year ended August 2002. Conversely, there was a net outflow to Australia of 13,100, less than one-half the net outflow of 29,100 in the August 2001 year.

Meanwhile, the Department of Labour has noted that by last year one in every three people of working age in Auckland was born overseas. The national ratio is one in five. This of course picks up several waves of immigration.

For further information contact Peter Conway on peterc@nzctu.org.nz